Coal lease sales potentially undervalued, leading to possible millions lost for government

coal460x276WYOMING- “The Bureau of Land Management is responsible for coal on federal lands. That coal makes up about 40 percent of total coal production in the U.S. Of the 314 existing federal coal leases, nearly a quarter of the leases are in Wyoming’s Powder River Basin. Companies acquire these leases by bidding on the right to mine the federal coal. It has generated a lot of income, which the federal government splits with states. But not everyone thinks the program is working as it should and that the government might be losing out on money.

IRINA ZHOROV: The American people own the about 570 million acres of coal in the U.S. and it is the Bureau of Land Management that administers the leasing of that coal. The current coal leasing program is supposed to ensure that the federal government gets a fair return on this one-time-use resource. But Director of the Natural Resources Law Center at the University of Colorado Law School, Mark Squillace, says the program is broken. Leases are now drawn up through a process that was initially supposed to be the exception.

MARK SQUILLACE: Instead of the government deciding how much coal to lease and how the track should look to maximize return to the government, the coal company makes those decisions. They design the tracts; they decide how much coal they’re going to lease. The government can change the application when it comes in, it rarely does in any significant way, and then the government basically acts on the application that was there.

ZHOROV: That process is called lease by application. Or, LBA. In the LBA system, sales are rarely competitive which, presumably, affects prices.

SQUILLACE: Since 1991 we’ve never had 3 bids on any lease tract, and in most cases, the vast majority of cases, only 1 bidder.

Financial analyst of the Institute for Energy Economics and Financial Analysis, Tom Sanzillo, says it’s possible to set fair market value even without competition.

TOM SANZILLO: You push the upper limits, you set higher prices, and you see how far the companies are going to go. It’s a tough tough negotiation to take place, but it’s one that ultimately the United States tax payer needs.   There’s no competition, the appraisals by all accounts including the Inspector General of the DOI are flawed, and there been no audit in 30 years. So there’s no accountability for the program, no oversight.

ZHOROV: The report he mentions makes clear that “even a 1-cent-per ton undervaluation in the fair market value calculation for a sale can result in millions of dollars of lost revenues.”

And Sanzillo says the market itself is as good an indicator as any that BLM’s fair market value estimates are not accurate. He gives the example of Cloud Peak Energy after a recent tract acquisition.

SANZILLO: It got a tract of coal, it got it for below fair market value, the markets are not stupid, the analysts understand, they stated so in the newspapers, and the stock price went up. That’s what happens when a company gets an undervalued asset; the company is actually worth more now. If you had a real fair market value then that impact on the stock market should be zero.

ZHOROV: Squillace and Sanzillo equate what they see as the too-low pricing of federally owned coal with a subsidy to coal companies. Sanzillo say the U.S. has lost out on 29 billion dollars in the past 30 years because of this practice. The Inspector General’s report put those potential losses at 60 million dollars for recent lease sales. The issue is perhaps all the more alarming as exports to Asia increase, since then the U.S. government would be subsidizing coal for Asia.

ZHOROV: Still, with high prices abroad, that small percentage of exports sometimes makes up a much more significant piece of the revenues for certain operators. And, by the way, exported coal prices are excluded from the appraisal process.

SANZILLO: I talk to the industry all the time. They don’t agree with us. I have to tell you, I am a person who has been involved in investing billions of dollars, I’m not quite sure that they understand what they’re doing.

ZHOROV: Sanzillo says Wyoming, with its high production in the Powder River Basin is a lynchpin in any discussions about changing the system and he says now is the time to do it, as the coal industry itself restructures and reevaluates this brave new coal world.

But at a recent coal lease sale, the BLM received even less bids than usual – zero. What Squillace and Sanzillo argue is below fair market value wasn’t low enough for companies being cautious in the struggling coal market.”

Irina Zhorov, Wyoming Public Radio

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